BOARD AGREEMENTS TO REMOVE DIRECTORS

The AICD believes proposed board agreements, where a director could be obliged to leave if the chairman and majority of directors decides this is in the interests of the company, are a step too far from shareholder interests. Such agreements are not legally binding.

The formal power to remove a director should remain with the shareholders, as exists under the Corporations Act. This is an important principle of corporate governance that should be maintained.

Weakening of position and independence of individual directors

The AICD believes that to formalise a board’s power to remove a director would weaken the position of individual directors, potentially compromising the independence of mind that is the objective of many other corporate governance principles. It would not be in the interests of shareholders to have a majority of directors empowered to remove a director who conscientiously disagrees with the board’s policy or key decisions. It should not be forgotten that directors are appointed to act on behalf of shareholders.

The power to remove a director is a reserve power that is likely to be used only rarely. In the rare event of an irreconcilable disagreement, a general meeting of shareholders is an appropriate way to decide the issue.

Changes in response to one example of board disunity

High-profile examples of board disagreement (NAB, Coles-Myer) have brought the issue of board disunity to public prominence, however the vast majority of boards in Australia function effectively and problems that arise are resolved satisfactorily within the current system.

In the rare situation where a director loses the confidence of the rest of the board, the director should normally resign. However, a director cannot be compelled to resign, as only shareholders have the power to remove directors. If a director refuses to resign and the board believes it is in the interests of shareholders to remove the director, the AICD believes the matter must be referred to a general meeting of shareholders.

Directors should always be aware that their duty is to the company and all its shareholders. They could fail in that duty by making a dispute public and bringing damage on the company.

Need for evaluation of collective board performance and that of individual directors

There is increasing recognition that boards are more effective if their collective performance and that of individual directors is evaluated regularly. Such evaluation may make it clear that a particular director who is not performing, and whose term has not expired, should leave the board and make way for fresh talent. Normally, when told of this assessment, the director concerned will leave quietly.

The same may happen if the company’s business mix changes and the board needs people with different skills.